Does This Rally Have Legs?

By Jonnelle Marte

The market is poised to have its best day in weeks, but investing pros say one Wednesday’s gains don’t provide much clarity on where stocks are headed.

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The Dow Jones Industrial Average jumped 287 points Wednesday, or 2.4%, one day after the index snapped a four-day losing streak. It also put the Dow back in positive territory for the year. Stocks, however, are likely to remain volatile as investors weigh the instability in Europe and concerns over slower economic growth in the U.S., says analyst and financial advisers. “One day doesn’t make a market,” says Donald DeMuth, president of Mighty Oak Strong America Investment Company, a registered investment adviser near Harrisburg, Pa. “Europe is still heading south.”

Indeed, investors – pros and individuals alike — remain skittish. Wednesday’s gains, which came as European leaders restated their commitment to fixing the debt crisis, followed a steep market drop last week that erased the Dow’s gains for 2012. Over the next few weeks and months, concerns over Greece’s possible exit from the euro zone, and its ripple effect across the global markets will likely weigh on stocks, pros say. “There are a lot of question marks out there and those have not gone away by any stretch of the imagination,” says Jim Holtzman, an adviser with Legend Financial Advisors in Pittsburgh.

Financial advisers say they are instead relying on longer-term trends for signs that it is safe to invest more aggressively. Jerry Verseput, a financial adviser with Veripax Financial Management in Folsom, Calif., says he is watching market dips more closely than market gains to gauge where the market is headed. For example, if on its next pullback, the Standard & Poor’s 500 stock index ends above 1278, the low point it hit last week, that would be a sign that the market is on an upward trend, says Verseput. On the other hand, if it goes below 1275, it’s more likely this was a short bounce, he says.

In the meantime, some pros are sticking with more conservative stances. Verseput, for example, gradually increased his clients’ cash holdings to 25% today from close to zero at the end of the first quarter. He is also minimizing risk by using put options, which allow him to sell stock at a certain price even after shares have dropped below it.

Holtzman is also taking defensive measures. For example, he’s using long/short mutual funds that can benefit when stocks rise but also when they fall. He also doubled his average stake in gold to 8% in April because he expects the yellow metal to serve as a good diversifier during periods of market volatility. “In this kind of market environment you can have a few good months and then it can get wiped out in two or three weeks,” says Holtzman.

Another challenge, say experts, is picking spots in the bond market, which is still offering record-low bond yields. In the past two months, Holtzman says he has been swapping longer-term bonds with 7- to 12-year maturities with shorter-term issue that mature in three years or less. With interest rates at historical lows — the 10-year Treasury hit a record-low 1.45% last Friday — there’s a greater chance longer-term bonds will fall further when rates start to rise again, he says.